Monday, November 24, 2008

Debate about an economic stimulus package continues to dominate the news. Obama recently called for a plan that will save or create 2.5 million jobs by January of 2011. It is unclear how large this package would be and how it would be spent, but he has indicated that a substantial portion of it would go towards rebuilding transportation infrastructure. Some people disagree about whether transportation should be part of a stimulus, while others disagree about what types of projects should be funded if transportation is part of a stimulus. These questions are best illuminated with data, so let’s get into the figures.

The Federal Highway Administration’s most recent 2008 estimate is that $1.25 billion in highway capital investment supports (not creates) 34,779 one-year jobs. As other scholars and government agencies have pointed out though, these figures must be treated with caution. There are several important caveats to transportation spending, among them: 1) federal deficits to fund spending can “crowd out” private investment, causing job losses in other economic sectors (Ronald Utt at the Heritage Foundation articulates this point); 2) the FHWA cautions that only short-term resurfacing and preservation projects spend funds quickly in the first year and thus have a timely impact; 3) unless there is excess unemployment, job demand for construction will merely be met by shifting workers from other sectors.

In short, it is very difficult to be certain about how many jobs will be created from increased transportation spending in the short term. Nevertheless, it might be a good time to invest in transportation. For instance, data from the Bureau of Labor Statistics indicates that there have been significant job losses in the construction industry in the past year (although there is significant variation between states/regions), meaning that highway construction jobs might bring people back to work without substitution. With regards to the immediacy of transportation spending, our system is in such a poor state of repair that now is an opportune time to focus on fixing what we have, which fits nicely with a fast stimulus. Perhaps the most important caveat, however, is the fundamental proposition that government spending in one sector inherently stifles growth in other sectors. This is a classic economic question, and we will leave it to more sophisticated economists. For two contrasting opinions compare the views of Brian Riedl and Paul Krugman. Riedl, of the Heritage Foundation, argues that stimulus fails because “every dollar Congress ‘injects’ into the economy must first be taxed or borrowed out of the economy. No new spending power is created.” Krugman, a New York Times columnist and Nobel prize winning economist, makes the case in a series of columns that increased government spending, on infrastructure instead of rebate checks, can play a decisive and vital role in restarting a stalled economy.

While the short-term impact of transportation spending is perhaps unclear, it is more broadly accepted that government investment in areas like infrastructure and education can pay greater dividends in the long-run. These investments increase productivity by improving human and physical capital – and the private sector generally under-invests in these public areas because it cannot fully capture the gains.

It seems increasingly inevitable that transportation will be part of a stimulus package. Although we may lack a perfect understanding of the exact benefits of transportation spending in the short-run, there is some understanding about the most valuable transportation investments overall, like system preservation. An effective stimulus package should focus on the most valuable and timely transportation investments, and this need not conflict with a broader view on promoting long-term prosperity.

Wednesday, November 12, 2008

As the economy worsens, transportation is being linked more directly to economic stimulus packages.Congress and the new administration have indicated a desire to include infrastructure spending as a component of an economic stimulus, and transportation is almost always mentioned as a substantial element of that infrastructure.Now there is also strong support among Democrats for a larger bailout of American Automakers, with President-elect Obama tying such a proposal to cleaner, more energy-efficient vehicles and President Bush insisting upon free trade as a prerequisite.

With complicated issues such as these, it is important to separate goals and actions because they are often confused.There are two goals that seem to be on everyone’s minds – short and long-term economic growth.But these are two different timeframes that necessitate different actions.

For example, a bailout of the auto companies is an action that is likely to be more effective in the short-term.Letting the auto companies fail would cause tremendous short-term hardship for many individuals, with ripples potentially felt across the economic spectrum.However, in the long-term a bailout would have the unintended consequence of rewarding, or at least not allowing the market to punish, an inability to effectively compete in the marketplace.This could mean the stifling of innovation and entrepreneurship, while encouraging entrenched corporate interests, and this could be economically damaging if extended to additional sectors.

By contrast, spending on transportation infrastructure is more likely to have minimal short-term benefits, but many long-term benefits.Assuming that the infrastructure spending is tied to potential benefits in some way, rather than just sent to states with no strings attached, it can have a marked impact on economic competitiveness.However, it can often be years before this impact can be seen, and at least a few months in most cases before people can even be put to work.In the short-term, there are better ways to protect people from an economic downturn.

This leads to the observation that some combination of short and long-term strategies is necessary.This will mean borrowing the best components of the two proposals discussed above so as to maximize the strength of each.The auto bailout, with its potentially dangerous long-term consequences, should be limited to a bailout of the workers and retirees who will be in real trouble as a result of their companies failing.These individuals should not be forced to endure hardship because of the missteps of management.The bankrupt companies can then either retool or be replaced by eager competitors.This would also be a place where the feds could play a role by providing seed money, or rewards, for developing the most fuel-efficient vehicles.Instead of picking winners, the government could instead encourage faster innovation on a level playing field.Such a strategy should be put forward with all due haste.

The stimulus package, on the other hand, should be carefully considered to ensure that it actually will accomplish something.People can be put to work digging a hole and filling it, but this will not create long-term economic growth.Funds to be spent on infrastructure should be tied to performance measures that evaluate whether their proposed use is likely to enhance economic growth in the long-term.Then the federal government should track these funds to find out whether they actually accomplished what they predicted.